Should I buy a currency-hedged gold ETF?

Dear Nancy,

I'm considering a gold bullion ETF. What are the pros and cons of Canadian-dollar hedged versus non-hedged?

Susan

Dear Susan,

The risk of buying anything that is not currency hedged is that your results can be either enhanced or made worse when there are fluctuations in the currency. For example, if you invest in a gold ETF that is not hedged and the U.S. dollar strengthens (rises in value versus the Canadian dollar) you would lose some of your investment. If the US dollar weakens then your investment will gain simply from the currency change. Both these examples are irrespective of a change in the actual price of the ETF.

If you buy an ETF that is currency hedged, then your true gain or loss in the price of the ETF is what you get. The ETF has in place mechanisms to avoid that other element of risk, primarily currency risk.

My advice is that if you think that the U.S. dollar is going to go down from the time of your investment to your expected time to sell, then go with the non-hedged ETF. If you think the U.S. dollar is going to get stronger then buy the hedged ETF because you don't want your capital gain to get reduced or potentially wiped out by the currency.

Remember that we have to convert all foreign currency transactions back to the Canadian dollar on the purchase and the sale for tax declaration purposes.

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com

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